There's new evidence that perhaps audit regulators have good reason to worry about audit quality when fees are under pressure, especially with smaller audit firms.

A new academic study emerging from the University of Kansas and the University of Pittsburgh suggests auditors with smaller audit firms may put less effort into the audit when their clients get rollbacks in audit fees. The study looked at audit fee trends for nearly 2,000 companies during the recession of 2007 to 2009 and determined almost half of them won reductions in audit fees in 2008.

Authors Michael Ettredge and Elizabeth Emeigh of Kansas and Chan Li of Pittsburgh said they measured auditor effort by assessing the prevalence of accounting misstatements and the absolute value of discretionary accruals. Accounting misstatements represent outright mistakes while discretionary accruals represent instances where companies have booked assets or liabilities they expect to realize or incur, reflecting a great deal more judgment.

The authors determined that companies that exerted pressure on fees were more likely to have accounting mis-statements and higher levels of discretionary accruals when their auditors came from smaller firms. The latest data from Audit Analytics says audit fees generally fell during the recessionary period then leveled off. As a percentage of companies' revenue, which has declined in recent years, audit fees have started to climb upward again, although the real dollar amount remains somewhat flat.

Daniel Goelzer, a member of the Public Company Accounting Oversight Board, said regulators are looking for signs that fee pressure might affect audit quality. When he was still the acting chairman of the PCAOB in December, Goelzer said at an accounting conference that the board's inspectors would be looking at fees as they inspected audit reports in 2011. “The board needs to understand how fee reductions affect audit performance and, where we find audit deficiencies, whether they are the result of the pressure of a reduced budget,” he said.

The authors suggest Goelzer's concerns may be warranted. The authors said they found instances where companies with factors or characteristics that usually lead to audit cost increases—like diminished profitability, increasing size or complexity, or other financial reporting risks—instead paid less for their audit work. “Our study provides initial evidence on the impact of a major recession on audit fees, and how the audit fee pressure impacts audit effort, proxied by mis-statements and discretionary accruals,” the authors wrote.